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Determination of Mark-Up Rate under Zero-Interest Financial System: A Microeconomic Approach

Author

Listed:
  • KHALED, SHAFI A.

    (Metropolitan State University, USA)

  • KHANDKER, A.WAHHAB

    (University of Wisconsin – La Crosse, USA)

Abstract

Misunderstood and maligned, the determinants of mark-up (MU) rate under Murābaḥah financing deserve scrutiny of its structural formulation. Some suggest that MU rate is really interest rate. Is MU transaction pure trade? We analyze by considering the underlying market structure, central bank imposed minimum reserve requirement, deposit sum, a bank’s fixed and variable costs, etc. Perhaps for the first time, the capacity to charge ribā is traced to market imperfection. Banks with no Islamic credential are entering the market suggesting presence of positive economic profit. By promoting proper costing, accountability, efficiency and standardization of MU rate across industry become possible. Prediction and hypothesis testing become possible. Associated with this, we also explore how the deposit rate is determined. The transparency thus afforded should mitigate the contentious debate about MU financing as opposed to interest-based lending.

Suggested Citation

  • Khaled, Shafi A. & Khandker, A.Wahhab, 2017. "Determination of Mark-Up Rate under Zero-Interest Financial System: A Microeconomic Approach," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 25, pages 15-34.
    • Handle: RePEc:ris:isecst:0166
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    References listed on IDEAS

    as
    1. Khan, Tariqullah, 1995. "Demand For And Supply Of Mark-Up And Pls Funds In Islamic Banking: Some Alternative Explanations," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 3, pages 1-46.
    2. Siddiqi, Mohammad Nejatullah, 2006. "Islamic Banking And Finance In Theory And Practice: A Survey Of State Of The Art," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 13, pages 2-48.
    3. Mirakhor, Abbas, 1987. "Analysis of Short-Term Asset Concentration in Islamic Banking," MPRA Paper 56029, University Library of Munich, Germany.
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    Cited by:

    1. Khaled, Shafi A., 2018. "Risk, Return, and Profit-Loss Shared Lending under a Zero-Interest Financial System," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 26, pages 1-30.

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    More about this item

    Keywords

    Mark-up rate; Murābaḥah; ZIFS; Islamic banking.;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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